Latin America GDP growth forecasts surge in recent months: Will the rally continue?

Over the past three months our LatinFocus Consensus Forecast has jumped 0.9 percentage points, bringing regional GDP growth up to 5.7% for 2021. The stark upward revision has been predominately driven by an accelerating vaccine rollout in key countries such as Argentina, Brazil, Chile and Mexico, while all but Mexico have also seen clear downward trends in new Covid-19 cases since June, boding well for the economic outlook. Moreover, the strong rise in commodity prices since the start of the year, coupled with the ongoing recovery in global economic activity, has supported the external sector, further boosting the GDP outlook in recent months.

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Looking ahead, our panel of analysts expects annual GDP growth to normalize in H2 this year as the low base effect fades, but it should remain upbeat nonetheless. Domestic demand should continue to improve amid pent-up spending and as looser restrictions support private consumption and fixed investment. Nevertheless, headwinds still persist due to elevated public debt, high unemployment and inflation, sociopolitical instability, the spread of the Delta variant globally and the recent hawkish turn from key central banks such as those of Brazil, Chile and Mexico.

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Insights from Our Analyst Network

Commenting on the recent shift in monetary stances at key central banks, analysts at Scotiabank noted:

“Latam central banks are grappling with rising inflation and the need to get the timing right on unwinding extraordinarily accommodative monetary conditions. Moving too soon, too aggressively could imperil recovery. Waiting too long risks embedding temporary inflation into expectations.”
 
Commenting on the economic outlook for heavyweight Brazil in H2, analysts at the EIU noted:

“The growth rate in 2021 overall will be mostly due to strong statistical carryover effects (3.6%) from 2020, as sequential growth will be curbed by rising interest rates and inflation, and a slow vaccine rollout. Our expectation of a gradual pickup during the second half of the year assumes that potential further major waves of coronavirus cases and mobility restrictions have less of an impact on activity as economic actors adapt and the vaccine rollout advances. Another risk to our forecast later this year is the impact of droughts on electricity production, which could lead to power rationing, outages and tariff hikes.”

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Disclaimer: The views and opinions expressed in this article are those of the authors and do not necessarily reflect the opinion of FocusEconomics S.L.U. Views, forecasts or estimates are as of the date of the publication and are subject to change without notice. This report may provide addresses of, or contain hyperlinks to, other internet websites. FocusEconomics S.L.U. takes no responsibility for the contents of third party internet websites.

Author: Steven Burke, Economist

Date: August 11, 2021

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